The Case for Way More Mandates

People who don’t buy insurance get a free ride
Illustration by Gabriella Marcella

Insurance mandates, far from being unique to Obamacare, are all around us. States require drivers to carry liability insurance. Your state government also provides you with—and charges you for—insurance against losing your job. The federal government mandates flood insurance for anyone living in a flood plain who has a federally insured mortgage. Social Security is mandatory insurance against a penniless old age, and the premiums are deducted from your paycheck, whether you like it or not. “This is part of our fabric,” says Ann O’Leary, director of the Children and Families Program at the Center for the Next Generation, a San Francisco think tank.

The logic of getting everyone to jump into the risk pool is powerful: Left to their own devices, many people will choose to go uncovered against fire, flood, car crashes, and cancer. Then, if something bad happens, they throw themselves on the mercy of society. The cruel solution would be to let them live (or die) on the streets. To our societal credit, we are unwilling to do this. A coverage mandate at least ensures that people who create the risks will bear the costs, on average, over time.

People who choose to skip insurance are often more shortsighted than devious. Most Californians who took out earthquake insurance after the 1994 Northridge earthquake have let it lapse, says Howard Kunreuther, a professor at the University of Pennsylvania’s Wharton School. “The biggest challenge we have faced is to convince a person, anyone, that the best return on an insurance policy is no return at all.” The point of a mandate isn’t only to protect people from the consequences of going unprotected; it’s also to prevent the rest of us from having to pick up the tab. That’s why the argument made by some conservatives—including Chief Justice John Roberts—that if the government can force us to buy health insurance it can force us to buy broccoli, doesn’t hold up. As Justice Ruth Bader Ginsburg countered, unlike broccoli, refusing to buy health insurance comes “at the expense of another consumer forced to pay an inflated price.”

Until now, if the federal government wanted to guarantee coverage it paid for it by levying taxes, as in Social Security. The Affordable Care Act offers a new model, says O’Leary: It tells people to buy coverage on the private market and taxes them if they don’t.

It’s easy to think of other insurance markets that would work better with a mandate. Mark Pauly, also a Wharton professor, favors requiring flood insurance coverage for everyone in a flood plain, whether or not they have a federally insured mortgage. He’d also enforce it more stringently: Right now many people drop flood insurance shortly after getting a mortgage, though it’s illegal. Pauly would even require everyone to have homeowners insurance: “The least costly way to pick up the stragglers is with a mandate,” he says.

Long-term-care insurance is another obvious candidate for a mandate. Currently, people who need nursing home care are advised to spend down their assets until they’re poor enough to qualify for Medicaid. Then the federal government and states jointly cover the cost of care, at an enormous and rising expense. That’s a classic case of throwing yourself on the mercy of society. Mark Browne, a professor of risk management and insurance at the University of Wisconsin School of Business, says people with middle-class incomes or better should chip in more against the risk that they’ll require long-term care someday. “If something doesn’t change it’s going to be a huge issue for the states and federal government,” says Browne.

The advantage of forcing people to buy insurance is that it induces them to do smart things to reduce their premiums, such as buying storm shutters along the coast. One flaw in the Affordable Care Act is that by prohibiting insurers from taking health risks into account in setting rates, it gives people no incentive to lower their premiums by losing weight or quitting smoking, say Kunreuther and Pauly.

Mandates could even lead to entirely new types of insurance. Yale University economist Robert Shiller envisions home equity insurance that would protect against a drop in the value of local housing. If you’re trapped in an unaffordable mortgage because home prices in your area have fallen and you can’t sell, the policy would pay out.

The concept is neat, yet it hasn’t caught on in the market. Requiring that such insurance be bundled into all mortgage loans would raise the interest rate lenders charge, which would not go over well with most homeowners. Shiller shies away from the word “mandate” but concedes the idea “might need some kind of regulatory help.” Says Shiller: “The public doesn’t seem to think that far ahead.”

Economists are in no position to judge whether such insurance mandates are constitutional or not, as Chief Justice Roberts pointed out in his health-care opinion. Roberts referred to economists as “metaphysical philosophers” and dredged up a 1905 opinion that said “the framers of the Constitution were not mere visionaries, toying with speculations or theories, but practical men.”

What economists can judge—without resorting to metaphysics—is what will happen when society implicitly promises a certain level of protection without requiring people to help pay for it. In the era of the framers, there was no expectation that the federal government would come to the rescue if a town were struck by flood or famine. Now there is, as shown by the lashing the Bush administration got for its slow reaction to Hurricane Katrina in 2005. Asks Browne: “Are we just responsible for ourselves, or are we a community, and everybody’s responsible for each other?” If it’s the latter, then with the benefit of the safety net comes the responsibility to share in its cost.


    The bottom line: There are already numerous governmental insurance mandates—auto insurance, Social Security—designed to spread risk.

    Before it's here, it's on the Bloomberg Terminal.